⚠️ If Nouns implements the Burn Mechanism, it is betting against time. This is dangerous to the DAO because it adds a new layer of risk, making the system more fragile to volatility.

As a quick recap of the events:

• Noun implemented its fork mechanism with intention to protect the honest minority

• Noun had their 1st fork with over 50%+ of the treasury disappearing

• Fork threshold lowered to 10% from 20%, lowering the threshold to attack

• Burn Mechanism proposal with intention to close the arbitrage vulnerability

• Noun 2nd fork is initiated 29 days after the first fork.

Previously, my main concern to the fork mechanism was that it opens up a perpetual arbitrage vulnerability. It seems that this worry may have become a reality.

However, now I have a new worry to express… as you read this, I ask you to read to the end and give it a minute to digest as I know this is a contentious topic (as most high stake governance questions are).

While I respect the will of the DAO, I feel compelled to write out my opinions because Nouns is one of the first projects that got me interested in web3 & governance. I feel strongly towards helping make Nouns sustainable and live the test of time.

Cost of protecting the honest minority

If I had told you the cost of protecting the honest minority in Nouns was $30M, would you have done it?

After the initial fork implementation, intentional or not, Nouns has set itself on a path towards a different problem space: “how to protect against the dishonest minority?” (aka arbitragers)

All decisions create path dependencies of their own. Once you start optimizing down one side of the curve, you may find yourself at a different destination — for better or worse. But if we take a step back to the original mission of why we began this journey. It was for a noble goal of “offer some protection to the honest minority”.

I still believe that this original problem statement is worth solving for. However, I worry that we’re now solution-ing for a completely different problem space with potentially unintended consequences from the original goal.

Nouns is now forced down a different (perhaps suboptimal too) path in creating a new solution to a problem that was self-created from solving a different problem.

Betting against time is a dangerous game

Now let’s assume that we want to tackle this new problem space of “Increase auction price above book value”**.

I am quite in favor of the north stars outlined in the Burn Mechanism article:

1. Spend treasury (with positive ROI)

2. Grow Nouns supply (to continue growth of treasury)

3. Increase auction price (to ultimately protect the DAO from arbitrage vulnerability)

While, I am in agreement of the problem space, I think there are hidden assumptions that is quite risky with the proposed solution. The solution now forces Nouns to consistently find projects that are ROI positive (where project increases auction price > more than spend).

This means that Nouns now must find:

• High quality proposals that are ROI positive from an auction price perspective

• High velocity to match the daily auctions, or as the auction prices increases,

• As auction prices increase, Nouns must also increase both the velocity and quality of future proposals.

If we can get this, this is a fantastic outcome. High quality and high velocity of ROI positive proposals? Which DAO wouldn’t want that? But the real question is: “Can we reasonably achieve this velocity within the next 2-3 years and maintain consistency forever?”

My worry is this method puts Nouns on a clock to find these proposals… at scale… it’s almost akin to scaling a startup prematurely before PMF or with negative unit economics…

In order for this to work as intended, two things need to be true:

• There’s enough liquidity for high quality proposals

• There’s a consistent supply of rising high quality proposals

Time is a risk because any downtime of either the velocity or quality bar will severely damage the treasury. I’m sure the DAO can sustain 1 burn, but how many burns can it sustain? It’s like having a scratch card, once you scratch it all — Nouns is gone.

• Low velocity? scratch

• Low quality? scratch

• Just a blip of downtime? People on vacation? scratch

• Crypto winter, ETH down? double scratch

This is effectively betting against volatility in both proposal quality and velocity. Trying to minimize volatility is one thing, but actively betting against volatility is a dangerous game because compared to the grand scheme of time, there will always be blips in market conditions that can potentially bankrupt the Nouns treasury.

In short, Nouns is putting itself on the clock, where any spike in volatility across time will slash the Nouns treasury.

Example:

This is not a perfect example, but to an investor, forced capital deployment is a risky mandate. Great investors (like Warren Buffett) do not rush themselves in deploying capital, in fact, quite the opposite for 2 reasons:

• If there’s a trough of bad opportunities → they can take a step back and not deploy, wait it out.

• If there’s a spike of great opportunities → can can better capitalize on this opportunity and deploy a lot!

The VCs who had a “capital deployment quota” generally do not end up with great returns, case-in-point: look at the investors who deployed a ton due to FOMO in the 2020 and 2021 vintage.

Use time to our advantage, not bet against it.

If we implement a Burn mechanism, Noun is now on a clock. I think betting against time is a very dangerous game, it is akin to catching a falling knife.

Instead we should be thinking about “how to use time to our advantage such that the ROI is no longer positive for the arbitrager”.

I don’t have a complete solution, but a couple of alternatives I’ve heard:

• Capped exit — sell your Noun on the secondary for any price, but on a fork, you can only receive max of your purchase price.

• Timelock/Arb Guardian — take the excess and timelock it for a period of time.

This way, time is working to Nouns’ advantage and against the arbitrager who’s IRR is now reduced if they choose to wait it out. Once the time value opportunity cost for the arber > timelock time, the arb will no longer be profitable.

The arb closes.

tldr;

If you made it here, thank you.

I know I’m taking a bit of an unpopular stance, but I care about the Nouns community. It’s a community I cherish and I want to see last the test of time. It’s done so much good from funding public software to art to generally promoting innovation, and I would hate to see it all gone.

The vision that first attracted me to Nouns was: build an enduring system that will continually push forward public goods, governance, and art.

While I am aligned with the intentions of Nouns, I worry that any mechanisms which add fragility to the system is very risky due to tail risk.

In short, I would advocate for Nouns to:

1. Not bet against time risk. Do not make bets where mistakes can kill the DAO.

2. Take a step back to exam what problems we’re trying to solve so that we’re not trapped in solving into a local maxima due to path dependency.

I leave you two quotes:

Do not test the patience of time.

If I had told you the cost of protecting the honest minority in Nouns was $30M, would you have done it?

~60% of the treasury